Putting the 2018-2019 State Budget on More Solid Ground

This week Comptroller Glenn Hegar announced that the revenue side of the 2018-2019 state budget – how much money Texas could spend on things – is much stronger than he predicted back in October 2017. More revenue is definitely good news for our growing state, because Texas has some unpaid bills for 2019 that will require far more state dollars than last year’s forecast provided.

The new revenue comes mostly from taxes, which could generate $6.4 billion more than previously estimated. The sales tax accounts for $2.7 billion of that. When the economy is strong, and people buy more things, the associated sales tax collections rise. Oil and natural gas severance taxes are now also expected to exceed the October 2017 estimate by $3.4 billion, due to the higher price of oil and increased production.

Good news, right? That depends.

Concerned Texans who want stronger state commitments to our public schools and social services need to consider this wet blanket on the Comptroller’s revenue update: only $2.6 billion of the “new” money is automatically available for education, health care, and other services supported by General Revenue. General Revenue comes mostly from taxes, as opposed to federal or other revenue. Much of the “new” revenue is not “General” because the Texas Constitution requires that $1.3 billion of the new oil/gas severance tax dollars go to the Economic Stabilization Fund, and $1.5 billion more to the Highway Fund (oil/gas taxes plus some sales taxes).

What’s more, almost all of the $2.6 billion in new General Revenue might be needed for just one of the big unpaid bills: the state’s share of Medicaid costs. The 2017 Legislature deliberately underfunded Medicaid caseload growth and budgeted almost nothing for per-client medical cost growth. Medicaid covers over half of all births in Texas and is a critical source of health care to millions of our friends and neighbors.

Another looming cost facing legislators in the 2018-2019 budget is the damage done by Hurricane Harvey. Federal disaster aid is covering the lion’s share of those expenses, but costs to the state general fund could be anywhere from $850 million to $2 billion.

The revenue picture could get even better before the Comptroller’s next update, in January 2019. If it doesn’t, the logical way to cover Hurricane Harvey costs or any other unpaid bills that might surface before 2019 ends is the Economic Stabilization Fund. In fact, the ESF gets called the “Rainy Day Fund” so often that many mistakenly think it’s only supposed to be used for natural disasters. But looking back at all the ways the Legislature has used the fund, only $303 million (3 percent) paid for natural disasters, compared to $11.3 billion in other uses.

In any case: Even before the Comptroller’s revenue update, the Economic Stabilization Fund was already the largest state reserve fund in the nation, and would have exceeded $11 billion by 2019. With the newly announced deposits, it could reach $13.4 billion after the transfer of 2019’s oil and gas tax revenue.

Unfortunately some lawmakers and anti-government zealots responded to the Comptroller’s announcement with proposals for more state tax cuts – the franchise tax, specifically, which is paid by businesses with at least $1.1 million in annual revenue. We know from experience this is a short-sighted idea that limits state aid to schools.

The hard truth is that recent tax cuts and diversions still create major challenges for state budget writers that are obscured by “smoke and mirrors,” making calls for new state tax cuts totally unrealistic. The Comptroller’s revenue update merely covers some current bills, pays for more highways, and increases the state’s “savings” account. Further cuts to state revenue, when the Texas population and economy continue to grow, would only put more pressure on local property taxes.

One final comment on the Comptroller’s announcement: half of the “good news” is still a forecast. With only two months remaining in fiscal 2018, adding $3 billion to this year’s tax collections is more or less a sure thing. For 2019, however, the Comptroller warns of “significant downside risks,” including tariffs that hurt Texas exports, or prolonged downturns in oil prices and production. He also points out, as he consistently has done in the interim, that the 2020-2021 budget cycle will pose additional revenue and budget challenges, such as a new dedication of car sales taxes to the Highway Fund, and a shortfall in the Texas Tomorrow prepaid tuition program.

If revenue continues growing at the current rate beyond 2019, legislators should have enough money in 2020-2021 for the “current level” budget requests being prepared – possibly even enough to increase state aid to schools and be more realistic about Medicaid, the Children’s Health Insurance Program, and other health care “current services” costs. Later this summer there will be important budget hearings at the Capitol and a chance for Texans to voice their concerns about where any future state revenue should go. Follow CPPP for the latest details.

Eva DeLuna Castro oversees the Center's work on fiscal and budget policy. She joined the Center in 1998 and focuses primarily on the state budget. Before coming to the Center, she was an Analyst for the Texas Comptroller of Public Accounts, researching various policy issues related to state revenue and spending. She earned a Bachelor of Arts in History and Literature, cum laude, from Harvard University in 1988 and a Master of Public Affairs from the LBJ School of Public Affairs at The University of Texas at Austin in 1997.